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Mar 20, 2013

Frank Caruso's Speech to NYU Law School on Doing Business in Shenzhen, China

Following is a synopsis of a recent lecture to New York University Law School students:
I Arrived in China after being in the IT industry for 10 years as an in-house attorney.  Came to work on a project as a legal adviser and ended up staying because I saw tremendous opportunity in China as well as in the legal industry.

Since then, I have worked for China’s biggest companies, the Beijing Olympics, many foreign companies including Fortune 500 and even advise foreign and Chinese governments.  I founded Caruso and Associates, Chairman at IPG Legal which is our Asia association and involved as a partner/equity stakeholder in several other businesses in China.

I could offer a boring academic lecture on Chinese law and the particulars of the Corporation Law or the Intellectual Property law, but, I thought it better to share my experiences with the law and the practice of it over here is developing and quite different than in the West and the nimble and open minded are the ones who can be successful in the legal profession in this region.

So, I’ve selected 5 critical things to remember, which you may have picked up in reading books on China, when/if doing business or advising clients here in China and I’ll highlight them with my own experiences and then open up in the end for questions.

1.  Nothing is Real in the Jungle
I call this place the Jungle, because it is.  This city of 20m people was literally carved out of Jungle and is in sub tropical Asia.  Everything grows here and it grows fast.  It is also a Jungle because of the laws of nature that seem to apply more than the laws of man (Western Man that is).

One is constantly amazed at the things we experience and see and even after ten years and considerable change, this place is still a Jungle.  If you are coming here expecting it or hoping it can be like the quaint civilized place that you grew up in Darian Connecticut it is far from it.  China, like it predecessors Japan, Korea and Taiwan does not innovate.  They copy.

And like their predecessors they will one day learn to innovate, but for now they are the most prolific copiers in the world.  Challenge everything here.  Do not take anything at face value, trust no one, trust nothing and when you finally verify enough to trust, verify some more and at some point your client won’t want to pay you to verify anymore or won’t think it’s necessary so make sure you cover your ass.

Some of my favorite copied and fake items:  Fake crab (Yancheng Lake), Fake egg, Fake divorce, Fake ambulance, Copied Software and Media and of course Copy Salt which is my favorite because it must actually cost more to make fake salt than the real stuff.
Don’t assume that anything or anyone is real and you will protect your reputation and your clients business.

2.  File IP Often and Early.
Apple v. Proview.  Proview is a Chinese company that made digital displays.  In 2000 Proview filed and received a trademark for Ipad from the State Intellectual Property Office.  As China is a first to file jurisdiction, the first to file gets the IP, and Apple had not even invented the Iphone, Proview was the rightful owner in China.  Note that Chinese IP is not widely recognized in other jurisdictions so if you are filing on behalf of your client, file in China first, then U.S. and then EU. So in 2006 Apple’s attorneys believed that they had paid $55,000 for the global rights to Ipad and rejected Proviews offer to sell for $10m believing that they were covered globally and didn’t need to  buy the Chinese trademark.  Hold on a minute.  When Apple tried to launch the IPad in China, Proview, in Bankruptcy, sued Apple and stopped the distribution and sale of Ipads.  Apple and their attorneys countersued which was a pointless endeavor because they neither had the law on their side nor did they have the court or the government.  In the end they ended up settling for $60M with Proview not to mention the several million in legal fees they had to pay and the opportunity costs lost from the delays, when they simply could have paid $10m and been on their way in 2006.  I had a similar matter with a client.  They came with a great product and a great branding strategy and wanted to bring the product to China.  I advised them that prior to talking to anyone in China or connected to China that they should at minimum file a trademark in China which costs about $2,500.  Of course they decided that they were smarter than me and proceeded to talk to several people who they “trusted” because they were a nephew of a friend, or had studied in Australia and spoke perfect English, or they went to church with their neighbor.  You can figure out what happened, they later decided to file a trademark and it was rejected because someone else had already filed it and this someone else was connected to the person they trusted whom they then had to buy the trademark from for several hundred thousand dollars or forgo bringing the product in under the current brand (which Brand is everything in China).

3.  Time is your Client’s Best Ally.  Never, ever, be in a Hurry when Negotiating.
I have a client who is a well known high end hotel chain known for their otherworldly bed.  For client confidentiality reasons I won’t their mention their name.  A couple of years ago at one of their properties here in the Jungle 3 Chinese men walk in and………….

Despite the disruption to a tax paying/employing Jungle resident (Hotel) the police did nothing – they just wanted it to go away.

The police were the arbitrators – at the Police station.
Under Chinese law, the rioters (family members) should have/could have been arrested and I demanded that they be arrested and jailed.

Even though it was grueling and I wanted to leave that Police station as quickly as possible because of their stupidity and circular reasoning, we waited them out.

They repeatedly pulled my Chinese lawyer into the other room and asked why she was being unpatriotic and not supporting the Police.  She mentioned Client Advocacy and they ignored her.  She wasn’t afraid because she knows I advise their bosses and they didn’t.

We threatened to call in the media, which pushed them along.  The media came and they were deported, so someone leaked stories to them this helped as they didn’t like to see their names in the Hong Kong newspaper.

Finally, after a few days they got tired, the Police got tired, and we held our ground.  They wanted to get back home to their families.

They agreed to a donation from the hotel for the burial costs which was far less than their asking amount.

As much as I wanted to throw my hands in the air and just say, “okay can we just get this over with”, we waited them out and earned a favorable result for our client.

4.   Expect Anything. 
I had a client years ago who wanted to set up a proper corporate structure in China and begin to export from their Chinese Foreign Owned Company.  The set up for this takes at least 6 months as the maze of bureaucracies one must navigate is insane. 

This client, a fortune 500 and listed holding company sold their products to Home Depot, Lowes and others around the world.  They had a Taiwanese GM in China who had been sourcing product from various factories and then shipping directly to clients like those I mentioned.  The CFO in the US would oversea the payments to suppliers and payments from customers. 

The Asian manager who was an American noticed that costs were increasing and that customer orders had been decreasing and this pattern had continued for several years.  So, they decided that they wanted to get better control over the process and bring the products to their facility and ship from their, so they hired me to come in and help them with this process. 

I spent about 15 minutes talking to their management and the Taiwanese snake when I realized that him and the CFO were skimming money through the purchasing process with local suppliers and that he had at the same time had his brother set up a factory (within 100 feet of their new facility) to make the products and sell direct to their existing customer base. 

To make matters worse, the Taiwanese had been paying off the local government mostly in liquor, meals and prostitutes and there wasn’t anything they could do about it other than abandon everything in that town and move far away.  This wasn’t the first or last time this has happened with clients.  As a listed company this also uncovered some serious Foreign Corrupt Practices Act issues for this client.  They chose to keep the status quo and I chose to move on to other clients.

5.  Chinese Lawyers are Different
We all know a dozen lawyer jokes and many of them are true.  Lawyers are sharks and can be very aggressive and can be ambulance chasers etc….  But, there are also many good lawyers and honorable lawyers and lawyers who take their ethical obligations and client advocacy obligations very seriously. 

China also has these lawyers.  However, the system of being a lawyer in China is completely different.  Firstly, less than 10% of lawyers taking the lawyers exam each year pass and the exam is very difficult purely because of the breadth of issues and information that must be memorized. 

Secondly, and most important the Chinese lawyers obligations are not to ethical practices or even their client they are first and foremost to China and the Party.  *Remember comment earlier from the Police attacking my lawyers Patriotism.

“I volunteer to become a practicing lawyer of the People’s Republic of China and promise to faithfully perform the sacred duties of a legal worker under socialism with Chinese characteristics; to be faithful to the motherland and the people; to uphold the leadership of the Chinese Communist Party and the socialist system; to safeguard the dignity of the constitution and the law.”

There also is not a system for malpractice or disbarment in China which enables a foreigner to make claims against their Chinese lawyer and even if you are told there is, it would be impossible to have the claim heard and for the foreigner to prevail unless the foreigner was a huge company with huge interests and investment in China.

Early on I was introduced to foreigners who had the rights to build/sell huge theaters in China and they were negotiating with a shopping mall owner.  I know the actual story because I know the shopping mall owner and he didn’t know I knew the foreigners.  Foreigners decided to hire a local Chinese lawyer instead of the American lawyer because they were told the American didn’t know Chinese law and didn’t understand Chinese culture and he was more expensive. 

So during negotiations, the foreigners new Chinese lawyer repeatedly met with the shopping mall lawyers and shared client information on the negotiations.  They agreed with the mall owner to share 3 ways the cost savings to the mall owner, which was in the millions, unbeknownst to the foreigners who ended up with a deal they didn’t like but were told by their lawyer that it was the best he could get. 

I don’t think they ever found out what hit them and even if they did, there wouldn’t have been anything they could have done.

6. Bonus
In order to recover, you must have a contract.  Without one your chances of recovery are near zero.
Any contract with a Chinese national must be in English and Chinese.  Be very careful of the Chinese translation as legal Chinese is very difficult.

7.  Foreign Judgments are Often Not Enforceable in China.
If the Chinese party has assets/companies in Hong Kong, use HK law and their courts.
While the law is important, it is not most important.  There are many other factors such as harmony, and social issues, and the application of the law, and the education/standing/party relationship of the parties and lawyers and judges.

I want to thank NYU and Adam Bedzow, the best intern I ever had, for inviting me today and wish all of you the best of luck with your legal careers, wherever they may take you.

Presentation by Frank Caruso - Chair of IPG's China Practice Team

IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S.